Irrational exuberence in ethanol

Feld thoughts has been looking at irrational exuberance in ethanol and been hit by two things. That, the idea of the US ethanol market resembels a bubble and that there is likely to be price inflation as the price of grains rise. Feld thoughts was looking at Is the ethanol boom going bust by Daniel Gross in Slate. That’s a pretty good connection, and there are interesting parallels with the .com bubble and railway booms in the 19 Century, but it would have been a more interesting analysis if the author had cast his net a little wider.

Its not just the US that inflation is happening in parts of south east Asia the price of palm oil, used there as a food first and a fuel second has risen high enough to make it useless as a feedstock for biodiesel. There have been food riots in the Yemen and Mexico over the price of staples this year. Sure there’ll be price inflation in the US, but in the short term the US can stand that. It’s the world’s poor in poor nations that rely on their states buying grain that are at the sharp end of the ethanol bubble.

Back to slate writing of the US ethanol market:

Critics of ethanol have long argued that ethanol production subsidies are a half-baked industrial policy scheme intended to reward politically powerful farmers in the Midwest. The gulf between the rich incentives for creating ethanol supply and the poor incentives for creating wholesale and retail distribution suggest the critics were absolutely right.

His words not mine.

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